How are you prepared for Uniswap's (UNI) long-awaited 'Fee Switch'?

Uniswap's proposed protocol charge, also known as the fee switch, would allocate 0.25% of the 0.3% cost to liquidity providers (LPs), with the remaining 0.05% purportedly going to holders of UNI tokens.

UNI holders have the option to activate the charge via a governance vote, but many are wary of doing so for fear that it will significantly reduce UNI's market share in the DEX market as LPs start to move their liquidity to other markets.

The Uniswap DAO is able to amass between 10-25% of the fees paid by financial intermediaries on a pool-by-pool basis by switching the fee switch, which can only be accomplished via a governance vote by UNI holders.

The fee switch has not been implemented since the release of Uniswap V3 in May 2021. That might soon change, though, as a proposal from PoolTogether's founder Leighton Cusack to activate the fee switch for three pools has passed the first two governance levels of Uniswap.

It is impossible to overstate the ramifications of the proposal: If it were to be approved, it would tell the market that Uniswap governance is capable of activating the fee switch. On Uniswap's Ethereum deployment, the proposal offers to collect a 10% share of the LP fees for three pools. The protocol allows for a per-pool take-rate of between 10 and 25 percent of LP fees, making this the lowest take-rate conceivable.

Holding UNI only permits users to take part in protocol governance as of Q3 2022. However, UNI token owners have the option to vote at any time to activate a "fee switch" for any individual pool. The protocol will receive 10–25% of the liquidity provider's fees if the vote for that specific pool is successful. Theoretically, these fees might subsequently be transferred to UNI holders through buybacks and burns.

The swap cost for transactions on Uniswap V2 is 0.3%, approximately 30 basis points (bp). Liquidity suppliers have more influence in Uniswap V3 since they can choose the swap fees for the specific pools to which they belong. The value here could be 1, 5, 30, or 100 bp. In light of this, both V2 and V3 feature a hidden "fee switch" that can be activated through the governance voting process as previously mentioned. Holders of UNI tokens can only share in swap fees paid by pools in this manner.

by Blockworks

The fee switch mechanism gives UNI holders more options than only how to divide the swap charge. In the end, the fee switch offers the Uniswap community the chance to keep some of the money paid to financial intermediaries and the most effective way to use that new revenue stream.

Community members have brought up the fee swap during governance talks, pointing out that it need not always represent incentives for UNI holders.

There are numerous ways to use retained money, including:

• Ecosystem Maintenance
• Treasury Structure
• Grant Funding

Although Uniswap frequently earns some of the highest revenue in the crypto world, the protocol would technically be operating at a loss without the fee switch. The introduction of the fee switch guarantees that the Uniswap protocol monetizes decentralized swaps successfully.

by Coinmarkets

Voting and proposal procedures

Three steps make up the Uniswap governance procedure. An initial yes-or-no vote is conducted, and it costs 25,000 UNI to complete. If the first vote is successful, there is a second UNI yes-or-no vote that needs 50,000 UNI to be carried out. The third step needs a wallet to have 2.5 million UNI tokens in order to formally submit a proposal if it manages to cross both voting barriers.

Voters largely backed starting the fee switch at a sum of 3.5 million UNI, with only 54 UNI voting against it in the initial vote that followed the exposition of the fee switch mechanism.

The purpose of this vote was simply to gauge how the UNI community felt about the issue. This sentiment analysis is related to V3 for three pools as well. Notably, the highest volume trading pools on Uniswap are these. With only a 10% reduction from LP fees, this particular idea did indicate the lowest potential fee range.

The following are the three pools that would implement the fee switch:

• ETH-USDC (1%)
• ETH-USDT (0.3%)
• ETH-DAI (0.05%)

The fee switch has only been temporarily activated. The proposal states that it will be operational for 120 days and that all retained fees will be sent to the Uniswap DAO Reserve. This brings us full circle to the discussion forums since there are still decisions to be made regarding the fee switch's future continuation and the precise use of the accrued funds in the Uniswap DAO.

Additionally, a supplementary consensus check was conducted, with 19 million UNI voting in favor of starting the fee swap pilot and only 418 UNI voting against it. This proposal made only minor changes to the initial plan, recommending that the 3 named pools make use of various fee-tiers to gauge the mechanism's impact over time. This would offer a lot more information and give the UNI community more useful data.

Fee Switch advantages and drawbacks

A review of the benefits and drawbacks of the fee switch is provided below:

Benefits

Since there are only a certain number of parameters that may be utilized to alter the fundamentals of the Uniswap protocol, governance is naturally constrained in its application. The UNI token also has little to no economic potential outside of governance. Due to the fact that one of the other major benefits of the UNI token is the ability to exercise governance over the treasury itself, the fee flip is of utmost significance.

As of Q3 2022, the value of the 291,708,000 UNI tokens held by the Uniswap treasury was $1.8 billion. Not included in this amount is an additional $1.3 billion that is invested and illiquid. Uniswap Treasury now has an approximated $3.1 billion in assets. As a result, among all DAO, Uniswap has by far the richest Treasury. A graph of web3's DAOs' treasury value may be seen below.

This is a sizeable sum of value, and the fee switch will allow the Uniswap ecosystem's stakeholders to strategically reinvest the capital that has been building up in its treasury. It is crucial for UNI holders to be able to do this so that the UNI token itself can become more useful and the Uniswap ecosystem can grow and enhance its own asset utilization within the crypto economy.

The UNI token's utility and tokenomics could be improved in order to draw in more investors and grow the ecosystem's stakeholder base. Additionally, this increases the value of token investments.

Drawbacks

Sending 10–25% of protocol fees to the Uniswap Treasury entails taking away an equivalent amount of value from liquidity providers (LPs). It might make liquidity pools on Uniswap less attractive in luring new LPs with a decrease in fees. Uniswap has developed its protocol in this way over time, regrettably at the expense of slower UNI token growth but without the fee switch mechanism in place.

A considerable reduction in protocol fees increases the risk of temporary loss for liquidity providers. Considering the nature of AMMs, temporary losses could happen as a result of token ratio changes within a pool, resulting in lower gains for LPs than those that would have been made had assets not been allocated to a liquidity pool. Swap fees are paid to LPs to mitigate this risk, reducing LP risk exposure and ultimately encouraging additional LP participation.

Typically, depositing liquidity as opposed to simply holding liquid assets entirely has caused LPs to lose value because to transitory loss. Therefore, a 10% decrease in costs could have a significant impact on how competitive Uniswap is compared to rivals like Curve or SushiSwap. The bottom line is that more competition could cause a liquidity problem on Uniswap as LPs opt to abandon UNI-based pools in preference of rivals.

Conclusion

Within DeFi and the larger web3 community, Uniswap is a pioneering effort. The methods and economic principles that the protocol employs will have a long-lasting influence on the rest of the ecosystem because it is the largest DEX. As a result, the fee flip is a crucial issue because it sets a standard for DEXs.

Above all, there are considerable benefits and drawbacks to the proposed UNI fee switch . A low impact on the protocol's overall growth with stable margins for LPs would be the best-case scenario. This would guarantee that Uniswap continues to appeal to rivals.

Additionally, this gives owners of UNI tokens a significant boost. The Uniswap treasury now has a legal value extraction mechanism to produce a revenue stream for UNI holders as a result of the accruing fees. This significantly increases the UNI token's utility and eventually benefits all ecosystem stakeholders.

What impact a fee switch implementation might have on the Uniswap environment is uncertain as of Q3 2022. Despite the increased incentives for the UNI coin, the hazards connected with such a proposition may be seen. Since liquidity is the most crucial component of Uniswap, encouraging its expansion is crucial to retaining users, earning revenue, and gaining value.